The best returns are probably behind the housebuilders but government support
should bring income for years to come, says Questor

House price party over?

Is the party over for shares in housebuilders after the Bank of England said it would stop a key funding scheme? The news that the Bank of England would remove the Funding for Lending Scheme (FLS) to boost household borrowing and instead focus the programme on small businesses sent shares in the sector sharply lower. After the announcement, shares in Persimmon and Taylor Wimpey closed the week down more than 6pc. However, fears that this is the first step to curtailing Help to Buy look misplaced. In fact, analysts believe this is a buying opportunity.

The punch bowl remains

The main driving force behind housebuilders’ shares during the past 12 months has been the success of Help to Buy. Analysts at Liberum Capital think the scheme is not under threat. Mark Carney, Governor of the Bank of England, when talking about the recent FLS changes, said: “These changes have no implications for HM Government’s Help to Buy scheme.” So far there have been no changes made to the Government’s housing support measures and mortgage approval rates reached a near six-year high in October as the scheme takes hold.

Structural support

The backdrop of the housing market still supports further share price growth. There remains a shortage of housing in the UK, with demand about twice the current levels of supply. Help to Buy is providing significant support to first-time buyers, which is allowing those already on the housing ladder to move up. Having cut costs during the recession, the housebuilders are now reporting improved margins and profitability. As order books fill up, this supports sales growth. Persimmon recently said sales activity was up a fifth on levels last year.

Income on offer

With the Government’s key housing price support measure still in place, sales for next year well backed up by record order books and profit margins returning to pre-crisis levels, the housebuilders’ pre-tax profit outlook is good. The sector is also not looking expensive, trading on an average of 11.5 times forecast earnings. While the best of the gains are probably behind the sector, there are still chunky yields on offer through returns of capital. Persimmon and Taylor Wimpey should both yield more than 6pc over coming years. Hold for income.